Some estate plans include a large life insurance policy held in trust. The money could be used to pay estate tax so other estate assets (real estate, retirement accounts) would remain intact.
The federal estate tax exemption is set to increase to $3.5 million in 2009, up from $2 million in 2008. With this increase, estate tax might not be due and the life insurance may not be needed.
In this situation, what might you do with the insurance policy?
* Keep it. You may have other uses for the life insurance. In a remarriage, for example, the insurance proceeds could go to children from a previous marriage while other assets are left to the surviving spouse.
* Surrender it. You’d get to keep the cash surrender value, if the policy has one, and you’d avoid future premium payments.
* Sell it. If you are in worse health now than when you applied for the policy, an investor group might buy it and keep paying premiums until you die. Then the investors would get the insurance money. The money you’d get from a sale might exceed the policy’s cash surrender policy.
* Donate it. You can get a tax deduction by giving an unwanted life insurance policy to charity.
* Swap it. You might be able to exchange an unwanted insurance policy for an annuity that can pay you lifelong income. Such an exchange may be tax-free, under Section 1035 of the Internal Revenue Code.
